Can open trading relationships substitute for direct government price supports in order to stabilize markets? More generally, how should CEEC governments allocate a limited budget amongst alternative forms of agricultural support, including commodity price supports, provision of public goods, and subsidies to restructuring? The goal of this paper is to analyze the effect of alternative accession scenarios and policy choices on the performance of CEEC agriculture, with particular attention to the process of enterprise restructuring. We analyze the decision problem facing a CEEC policymaker contemplating integration of his country’s agricultural sector into the EU, through use of a simulation model of production, trade, and enterprise restructuring in the agricultural economies of the CEECs. We focus particularly on how pre-accession agricultural trade and support policies affect social welfare, under alternative assumptions concerning the form of the “accession contract,” i.e., the terms governing the country’s entry into CAP. We approach the questions highlighted above with a partial equilibrium analysis; we do not address the general eqUilibrium effects that link agriculture to other economic sectors, nor the overall macroeconomic performance of these countries. A maintained assumption throughout is that no major reform in the CAP is presumed to be carried out prior to accession. The paper is organized as follows: Section 2 presents the analytical framework. Section 3 describes the data used to calibrate the simulation modeL In section 4, we present the results of several simulation experiments. Section 5 concludes with the key points learned through the exercise.Simulation experiments were performed using a dynamic model of agricultural production, trade,raspberry container size and enterprise restructuring in a three-region partial equilibrium framework, subject to policy interventions and random shocks.
The first region, called the CEEC, represents a generic Central and East European Country in which farmers hire land, labor, and a composite variable input to produce a homogenous output. The effective price of the variable input depends on the CEEC governments’ expenditure on infrastructure and other public goods. Profits depend on the realization of random variables governing the domestic harvest and the prices prevailing in the other two regions, the EU and the Rest of the World . The commodities produced in the regions are perfect substitutes for one another. Trade flows are affected by tariff rates in the EU and the CEEC. In between production periods, some farm enterprises in the CEEC make investments to restructure their operations, thereby improving production efficiency. There is also a migration of land between the large state and collective farms, and smaller private operations, in response to profit differentials between those types of enterprises. The CEEC government can affect the pace of enterprise restructuring through expenditures on targeted credit subsidies. Simulation experiments were performed on the model calibrated to data and estimated parameters for the Czech Republic drawn from a variety of sources. The Czech Republic was selected as the subject of the simulation experiments due to the availability of a variety of data sources for the Czech agricultural sector, encompassing both basic statistical compendia and summary analyses. Wage rates in agricultural enterprises are drawn from official statistical sources . Data on agricultural labor force participation and capital usage are based on Ratinger and Fischer . Ratinger provides information about the size distribution of farms, national output, tariff rates, national food consumption, farm profits, and other national aggregates. Elasticities of production were based on estimates by Ratinger and Fischer , normalized to correspond to evidence that farming exhibits constant returns to scale.
Information about levels of public investment were drawn from publications of the Organization for Economic Cooperation and Development . CAP policy parameters, including threshold and intervention prices for cereals, are drawn from Weyerbrock . The model is designed to answer general, “big picture” questions about the effect of government policies on developments in the agricultural sector rather than detailed questions about the varying effects on d1fferent crops, growing regions, and so forth. It therefore treats all production as aggregated into one measure of output. We use the cereal grains as a proxy for all crops when carrying out calculations on production levels and prices. When converting between national aggregate measures and measures specific to the cereals sector, we apply a conversion factor reflecting the fraction of cereals in the total value of Czech production . In the absence of comprehensive farm-level data on production efficiency, several model parameters had to be calibrated to the available data. Total factor productivity parameters were derived from the production function [equation ] using the data on total output and factor A intensities described above The parameters b and b governing the size of the CEEC and EU grain markets and , respectively were likewise calibrated from available price and quantity figures using an own-price elasticity of demand for food of -0.3. The costs of enterprise restructuring, and the effectiveness of non-distortive government support for agriculture in lowering production and restructuring costs, are exploratory estimates.13, 14 The constructed model was used to explore a set of questions concerning the effect of various government policies on outcomes in the CEECs’ agricultural sectors. These experiments . . consider policy issues of short-, medium-, and long-tenn importance: price and output stability, farm enterprise restructuring, and convergence with EU nonns. The experiments focus on the interaction between policies that CEEC governments adopt in the current transitional period, and the policies that will apply during the first few years of the CAP. Four sets of pre-accession policies are considered: a laissez-faire approach, a gradual convergence of policy to EU norms, an immediate implementation of “CAP-like” policies, and an activist approach focusing ori targeting government intervention to nondistortive interventions.
For each of these policy paths, the effect on prices and output ; on farm enterprise restructuring; and on the welfare of producer, consumers, and society overall, is investigated. We then examine the effect of accession to the EU in 2001, under alternative assumptions about the form of the accession contract. Taking as given the state of the economy after the implementation of a consistent transitional policy, the effects associated with full admission to an unreformed CAP; with a two-tier CAP system; and with a no-entry scenario are examined. In this set of experiments, the CEEC government follows the advice of “Big Bang” advocates, addressing the agricultural sector with a “hands-off’ approach during the 1993-2000 period. No expenditures on credit subsidies, public goods, or intervention purchases are incurred. The sole protection granted the market is a modest 20% tariff on imports. The result is stagnation. Inefficient producers, lacking any access to long-term credit, and able to borrow for the short term only at usurious rates of interest, are unable to generate the surpluses necessary to undertake efficiency-enhancing investments. The restructuring process barely moves forward; the only notable changes in farm organization come as already-healthy small farms merge into larger units in search of economies of scale . As land is under the control of inefficient production units, output remains low, and prices are governed by the need to purchase expensive imports and to make up for domestic shortfalls . Since the CEEC is presumed to accede to the European Union in 2001, the fate of the agricultural sector in the period after 2001 is affected by the treatment of agriculture under the treaties of accession. Here three possibilities are explored.In this set of experiments, CEEC governments anticipate accession to the EU by instituting preaccession policies that converge gradually with those that will prevail after accession. Thus, price supports and tariff rates are slowly increased over the period, 1993-2000. In addition,raspberry plant container the government expends funds on public goods and restructuring subsidies at modest levels during this transition period. We explore two possibilities, one in which the final accession contract to which the economy converges involves full entry into the CAP, and a second in which the accession contract is a two-tiered version of the CAP, as described above. We also include a modest budget for public goods and restructuring subsidies. As the price floor and tariff protection start to bind in 1997-98, output surges, generating producer surpluses large enough to finance restructuring investments. Taking advantage of the restructuring subsidies, farmers move essentially all land held in “inefficient” states into efficient states, so that by 1998 the inefficiency associated with the legacy of socialism has been squeezed out of the system . As production continues to climb, government spending increases, creating a drag on total social welfare. The EU entry has little effect on these patterns, and there is very little difference in outcomes between the two-tier and full-entry scenarios. Full entry into CAP does involve slightly higher government expenditure on price supports and slightly lower total welfare as a result, but these differences are quite small. Comparing the gradual convergence policy and the laissez-faire approach, the effect most immediately apparent is the difference in the degree of farm restructuring. Consumer surplus after 2001 is independent of the choice of pre-accession policies, since in both instances the prevailing prices are set by a binding government-imposed floor. However, the combination of modest price supports and non-distortive interventions creates the conditions for farmers to improve production efficiency and generate large gains in producer surplus, thus increasing total welfare, even with the modest increase in expenditures needed to maintain the price supports.
Pre-accession policies, rather than trading opportunities, are the most important determinants of this improvement. In this set of simulation experiments, we consider pre-accession policies that seek to bring agricultural supports into immediate alignment with those that will prevail after the accession period. Price floors and tariff rates are raised to CAP levels starting in 1993, and the CEEC government makes no expenditures on non-distortive supports. We again explore two possible forms of the accession contract, one involving full entry into the CAP in 2001, and a second in which a two-tier system is implemented. Comparing these results with those for the laissez-faire baseline, the immediate difference is that restructuring happens rapidly . The price supports and market protections act as a form of credit subsidy, allowing for rapid reorganization of inefficient agricultural enterprises into efficient holdings. As a result, output jumps .As prices are supported, these increases lead to gains in producer surplus which are overshadowed by sharper increases in government spending. Overall, however, outcomes are superior to those associated with laissez-faire policies, for the same reasons as state above: The key is to fmd a mechanism to finance restructuring. Side-by-side comparisons of the full CAP scenarios, one preceded by laissez-faire, the second by immediate implementation, show large improvements in social welfare associated with CAP-like pre-accession policies . , , Comparing the full CAP with the two-tier CAP shows modest differences. As might be expected, higher price supports place more cash into the hands of farmers more rapidly, and therefore induces faster enterprise restructuring, and hence generally higher levels of output and, of course, higher prices. Spending on public goods, in the two-tier version of CAP, shows up in higher levels of output in the long-run. Overall social welfare is slightly higher under the two tier regime than under the full CAP system. In the pre-accession period, restructuring takes place somewhat more slowly than in the other scenarios we have considered. However, the availability of long-term credit eventually drives all land into the control of efficient producers. In fact, the takeover of the large, efficient farms is, by the year 2000, almost absolute . The increased efficiency of production allows for a sharp rise in output, turning the country from an importer to an exporter. Prices nonetheless remain low and stable, dictated more by competition with world markets than by government supports.Producer surplus increases during the simulation period, reflecting the benefits to farmers of reduced production costs. Agricultural social welfare reaches its highest level amongst all scenarios . With respect to alternative accession arrangements, as we move from full CAP to two-tier CAP to no CAP, we are simultaneously decreasing price supports and tariffs while we increase moneys targeted to public goods. This movement corresponds to increase in output decreases in commodity prices, and a dramatic increase in agricultural social welfare. Thus, in this model, entry to CAP can be counter-productive if it requires a diversion of funds away from the maintenance of infrastructure and credit support. In this paper, a model of the agricultural sector for a generic Central and East European nation is developed that attempts to represent the key characteristics of these transition economies.